Black Swans and Dominos – the bad debts we couldn’t predict

Black Swans and Dominos

– the bad debts we couldn’t predict

By Dafydd Owen MICM ACIB*

Dafydd Owen MICM ACIB

Imagine your dream customer for a moment. Maybe it is a large, stock exchange listed, multi-national company with significant government contracts. Possibly a global energy company. It might even be one of the world’s largest investment banks with over 25,000 staff. Who wouldn’t want to sell to businesses like these?

What could possibly go wrong? Well let’s put Carillion, Enron and Lehman Brothers to one side for a moment. When Nassim Taleb popularised the term “Black Swan” in his 2007 book he outlined three key ingredients; it is so rare that no one could have even anticipated it, its effects are catastrophic, and it is regarded as predictable in hindsight.

We’ve lived through more than our fair share of Black Swans in recent years and the lessons have been out there for all of us to learn. After the big event comes all the small ripple effects. The failure of Lehman Bros has been estimated to have directly caused at least 75 distinct bankruptcies. Each of those businesses left a trail of unpaid debts in its wake. The bush fires of 2019-20 saw government and state cash diverted from bus refurbishment projects to rebuilding schools and communities. Our old friend Covid saw flocks of Black Swans impacting fruit harvests, travel businesses and so much more.

Credit control is often an under appreciated art in the commercial world. AICM members take pride in their ability to assess a customer and onboard them efficiently and safely to protect the cashflow of their businesses. We use credit reports to look backwards at payment history, we draw on longstanding reputations to gauge their willingness to pay, on time, every time. We make a reasonable stab at their ability to pay based on their record of settling past invoices and other suppliers.

“The failure of Lehman Bros has been estimated to have directly caused at least 75 distinct bankruptcies.”

“When Nassim Taleb popularised the term “Black Swan” in his 2007 book he outlined three key ingredients; it is so rare that no one could have even anticipated it, its effects are catastrophic, and it is regarded as predictable in hindsight .

As a young banker in the early 90’s the first things I assessed were – PAR; Person, Amount, Repayment. This had been drilled into me before any facility was considered. What Midland Bank (yes, I’m that old) didn’t teach me is how to assess the downstream impacts of supply chain disruption. Or the likelihood that a builder can’t trade due to timber and labour shortages. I spent my time looking backwards but thinking I was looking forward. I was certain I’d made the right decision. Moving into trade credit insurance in 2010 I learned a new definition of risk (thanks ANZIIF); z The chance of loss or hazard z Uncertainty as to whether an economic loss will occur z The effect of uncertainty on organisational objectives.

That was a lot of uncertainty and chance for a guy that was rooted in certainty and confidence. Working with trade credit insurance my job was to predict the likelihood of payment default. Using financial data, economic predictions, and understanding the nature of the enterprise helped me enable businesses to trade with confidence when they were heavily exposed to potential bad debt losses. I was pretty good at it.

Although occasionally I got it wrong. I missed something so rare that no one could have anticipated it (or so I thought), its effects would have been catastrophic to the client if they hadn’t been insured, and it could have been regarded as predictable in hindsight. But luckily for them, and all the domino businesses downstream, they were covered and lived to tell the tale. What is your Black Swan plan? I’d love to hear it.

*Dafydd Owen MICM ACIB Client Manager – Credit Solutions Aon T: 0466 851 198 E: dafydd.owen@aon.com